TransUnion Study: Negative Credit Impact from Plunge in Oil Prices May Have Only Begun in Alberta and Saskatchewan

The negative impact of oil price declines since late 2014 are beginning to manifest across oil-rich regions such as Alberta and Saskatchewan, according to a new TransUnion (NYSE: TRU) study. The study found that consumers in both Alberta and Saskatchewan could expect sharp increases in credit and loan product delinquencies in the coming quarters.

“Based on an historical analysis of the last oil crash and recent payment behaviour trends, we expect materially higher delinquency rates in Alberta and Saskatchewan in the second half of 2015,” said Jason Wang, co-author of the study and TransUnion’s director of research and industry analysis in Canada. “If lenders do not take proactive measures to address the impact of the decline in oil prices, we could potentially see double-digit delinquency rate increases in Saskatchewan, and as much as a 60% rise in areas of Alberta."

Traditional measurements of consumer credit health usually include the incident rate of being 90 days or more past due, or even being written off the books as a loss. “These measurements are trailing indicators with a material lag before one can see any change in effect. Relying on these metrics alone can result in lenders losing precious time to take action in managing the risks in their loan portfolios,” said Wang. “However, payment patterns have proven to be a strong leading predictor of subsequent delinquencies, and we have observed deteriorating trends in Albertans’ payment patterns.”

The first sign of cash flow problems is shown in reduced credit card payments. If a credit card has a month-end balance of $1,000, for example, the statement typically also states a “minimum amount due”—a small fraction of the total balance which can be as small as $25. While many consumers will pay the entire balance in full every month (called “Transactors”), others only pay a portion of the balance. The fraction of the balance that is paid—and changes in that fraction—are quite effective indicators of future non-repayment risk.

The study took a close look at the payment patterns in the Alberta oil town of Fort McMurray, and found that the number of residents there who pay no more than twice the minimum amount due on their credit card balances had increased by 10% from last summer. No such increases were observed for the rest of the country. “In short, this is a first sign of emerging liquidity constraints. As a result of the slump in the oil industry, many consumers in Alberta may be facing challenges meeting their monthly payment obligations,” said Wang.

Alberta’s heavy dependence on oil and the large number of lending accounts held by consumers living there place added pressure on the province when there are major moves in oil prices. The weight of the oil industry in provincial gross domestic product (GDP) – 26% – is by far the greatest in the country. Alberta also ranks fourth in terms of the percentage of lending accounts in the province, behind Ontario, Quebec and British Columbia.

Lower oil prices in Canada most impact the provinces of Alberta and Saskatchewan. Insolvencies, primarily personal bankruptcies, are an extreme form of inability to maintain debt. Insolvencies in Alberta and Saskatchewan have material negative correlations with oil price. The lower the oil price, the higher the insolvencies (primarily personal bankruptcies). This is not the case in any other Canadian province.

Correlation (1987 – 2013): Oil Prices to Insolvencies

Alberta

(0.50)

Strong Negative

Saskatchewan

(0.23)

Moderate Negative

Ontario

0.07

Weak Positive

British Columbia

0.08

Weak Positive

Quebec

0.32

Moderate Positive

Canada

0.15

Weak Positive

Source: Personal insolvency data provided by Industry Canada.

Historical Context

In both speed and severity, the 2014-2015 oil price drop has resembled the oil slump of 2008. WTI Crude Oil traded at U.S. $91.17 per barrel at the beginning of Q4 2014, but closed down more than 41% at U.S. $53.45 by the end of 2014. The drop continued into 2015, and on July 13 oil stood at U.S. $52.19.

In comparison, oil topped out at U.S. $145.16 in July of 2008 and fell as low as U.S. $30.28 merely five months later.

While the country was in a recession during the 2008 oil plunge, many lessons from that time can still be used when observing the current decline. The onset of worsened delinquency rates for Alberta in 2008 occurred approximately two quarters after the drop in oil prices. Overall delinquency rates jumped nearly 60% in the four quarters following the oil slump. Delinquency rates only recovered to levels observed prior to the oil slump two years after oil prices recovered. “These are particularly noteworthy observations because it shows that Albertans suffered financially for a period much greater than the actual oil slide and recovery,” said Wang.

TransUnion’s study also found that in 2008, rates of serious delinquency (90 or more days past due) for credit cards increased 75% in the year following the oil price slump. In addition to the significant rise in the number of charged-off accounts, credit cards saw an overall increase of 56% in average balance of charge-off. In other words, more accounts were going bad, and those that went bad were losing more money than before. Nearly six years later, balance per charged-off credit cards is still higher than pre-2008 levels by 21%.

“What’s particularly important to understand is that balances are much greater today than they were in the 2008 and 2009 period. Thus any delinquent accounts will place a greater burden on the economy,” said Wang.

Solutions to the Potential Crisis?

TransUnion’s study indicated that the close relationship between oil prices and investment in the oil industry will likely impact Alberta for at least a few more years. Alberta’s 2015 Fiscal Budget expects private investment to drop more than 5% in 2015 and the decrease is expected to continue through 2016 before a moderate recovery in 2017.

To mitigate some of the risks, TransUnion developed methods and metrics that can help identify risk at the individual consumer level. TransUnion’s proprietary CreditVision algorithms in three categories – payments, revolver/transactor status and credit usage/limits – help lenders predict potential delinquencies.

TransUnion’s tools can also help identify deteriorating trends in leading indicators within oil-heavy areas.

These tools allow lenders to build dynamic strategies to prevent or overcome potential impact to their bottom line due to the oil slump.

“We believe there is a potential credit crisis in the offing in the oil regions of Canada—but that crisis is not inevitable. We hope that by examining such leading indicators of delinquency as payment ratio on a credit card, lenders will be well equipped to identify and anticipate which consumers may run into financial problems, and when. More importantly, these tools allow lenders to work closely with consumers to help avoid or mitigate some of the problems they may be facing during the difficult times immediately following the oil price decline,” said Wang.

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